Back to the ‘80s to Examine the Relationship Between Mortgage and Rentership Rates

The rapid run up in mortgage rates in 2022 was a surprise to most as Mortgage News Daily showed that mortgage rates peaked at 7.32% on Oct. 20, 2022, an increase of a whopping 4.54% over 2.78% on Dec. 28, 2020. This dramatic increase in mortgage rates has been a large contributor to pending home sales falling below their nadir during the Great Financial Crisis. A question we at Middleburg Communities ask ourselves is how this may affect the future of rental housing in our region. To get insight into the relationship between mortgage rates and the rentership rate, we can start by charting them going back to the early 1970s as depicted in the chart attached.

The data shows that the only time there had been a similar dramatic and sudden rise in mortgage rates was at the end of the 1970s when Paul Volcker’s Fed was fighting inflation. During this period, mortgage rates rose from 9.02% to 18.45% over several years which would have caused one’s mortgage payment to increase by 91.7%. This run up in mortgage rates precipitated a drop in the homeownership rate from 65.8% to 63.5% and correspondingly increased the rentership rate from 34.2% to 36.5%. While this was only a 2.3% decrease in the homeownership rate, it increased renters by 6.7%.

Yet during the Great Financial Crisis, mortgage rates did not increase significantly prior to the homeownership rate dropping from 69.2% to 62.9% with a corresponding increase in the rentership rate from 30.8% to 37.1%. This dramatic shift took place over a decade and just this increase in the rentership rate increased the number of renters by 20.5%. This shift to renting was a large tail wind to the rental residential sector both during and after the Great Financial Crisis.

In comparison to the 1970s, the rapid run up in mortgage rates in 2022 increased mortgage payments by upwards of 70% which has moderated back to the low 50% range. Yet this still significant increase in borrowing costs will likely again precipitate a drop in the homeownership rate and commensurate increase in rentership as was experienced in the late 1980s. There is large uncertainty in how much the shift will be as it is affected by many factors including the overall health of the economy and the future of mortgage rates which in turn are affected by the future path of interest rates, for which there is no shortage of speculation.

To address this uncertainty, we can employ the very un-scientific method of “eyeballing” the homeownership rate and making an informed guess as to where the homeownership rate will likely end up in light of the recent run up in mortgage rates. We know from historical precedent that a large increase in mortgage rates leads to lower homeownership and conclude that the homeownership rate will likely decrease from its current 66.0%. On the low end this may have the rate end up at 65% and at the high end perhaps 64%. These reductions correspond to a 2.9% and 5.9% increase in renters respectively.

This relationship gives us at Middleburg Communities comfort that the recent run up in multifamily starts will not result in a glut of apartment inventory. Green Street recently projected delivery of 1.8% of existing apartment stock in 2023 and 1.9% in 2024. We believe that the anticipated decrease in ownership rate and corresponding increase in rentership itself will largely absorb this new inventory. In addition, our Sunbelt target markets are expected to experience significant organic growth which will generate additional demand.